## 1sycea2022006 ## Source details **Canonical URL:** [1sycea2022006](https://www.imf.org/-/media/files/publications/cr/2022/english/1sycea2022006.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1sycea2022006.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1sycea2022006.pdf.json) --- ### Context and recent developments - Tourism-driven recovery: - Real GDP growth expected to accelerate to 10.6 percent in 2022, up from 7.9 percent in 2021. - Tourist arrivals reached 241,204 at end-September 2022, a 125 percent increase over the same period in 2021. - Tourism-related industries account for 20.9 percent of GDP and 26.7 percent of employment. - Labor and inflation: - Average employment increased by 4.5 percent between Q2 2021 and Q2 2022; non-tourism sector employment gains were 1.5 percent from Q2 2021 to Q2 2022. - Inflation dynamics: after averaging 9.8 percent in 2021, year-on-year inflation declined to 3.0 percent at end-September 2022. - Monetary policy rate remained unchanged at 2 percent since mid-2021 (MPR stands at 2.0 percent). - External position and reserves: - Gross international reserves (GIR) increased to US$702 million (3.7 months of imports) but declined to US$640 million at end-September 2022 (3.2 months of imports). - Currency movements Jan–Sep 2022: NEER up 13.4 percent, REER up 14.3 percent, and appreciation of 2 percent versus the US dollar. - Fiscal consolidation and debt: - Primary fiscal balance reached a surplus of 2.1 percent of GDP at end-June 2022 (some projections report a primary fiscal deficit in 2022 expected to narrow to 1.1 percent of GDP). - Public debt-to-GDP ratio projected at around 68 percent at end-2022 in some summaries; debt-to-GDP ratio fell to 63.0 percent at end-September 2022 (a 10-percentage-point reduction since end-June 2021). - Consolidation described as an extraordinary consolidation of 13.6 percentage points over the last two years, with a 21-percentage-point reduction in public debt-to-GDP over two years reported in some statements. - Financial sector: - Non-performing loans (NPLs) doubled to 8 percent in August 2022 from 4 percent in August 2021, mainly due to withdrawal of forbearance measures in February 2022. - Regulatory capital around 21 percent of risk-weighted assets in August 2022. - Provisioning for the banking sector increased to 8.1 percent of gross loans from 5.1 percent during the same period; provisioning level for NPLs is 25 percent of NPLs noted elsewhere. ### Outlook and risks - Growth and inflation projections: - Real GDP growth: 10.6 percent in 2022, moderating to 5.4 percent in 2023 and about 4 percent over the medium term. - Average inflation projected to decline to 3.0 percent for 2022, before rising to 4.5 percent in 2023. - GDP deflator average: 2022: 2.0; 2023: 4.2. - External sector: - Current account deficit expected to narrow to 6.7 percent of GDP in 2022 and 4.9 percent of GDP in 2023. - Key downside and medium-term risks: - Worsening prospects in key tourist markets: Russia, the European Union, and the United Kingdom. - High food and fuel prices affecting the most vulnerable. - Resurgence of COVID-19. - Higher-than-expected inflation. - Higher NPLs from legacy forborne loans. - Climate-related shocks (coastal erosion, electricity generation and distribution, waste management). - Policy response considerations if risks materialize: - Maintain a flexible exchange rate. - Consider further fiscal measures, including appropriate revenue and expenditure measures. - Protect the most vulnerable through targeted support. ### Program performance and financing - Program implementation: - All end-June 2022 quantitative performance criteria (QPCs) and indicative targets (ITs) as well as all end-September 2022 ITs were met. - Seven out of nine structural benchmarks (SBs) assessed for this review have been met or implemented with delay. - SB not met: publication of a new medium-term debt management strategy (reset for December 2022). - SB not met: streamlining VAT exemptions (postponed; Fund TA delivered September 2022; streamlining no earlier than December 2023). - New SBs added on SOEs transparency and economic impact analysis for the tourism sector. - Financing outlook and reserves: - Program fully financed with firm commitments for the next 12 months. - International reserves projected around 3.2 months of prospective imports by end-2022; expected to be equivalent to 4.6 months of imports over the medium term. - Financing table highlights (Millions of US dollars): - Current account balance: 2022: -131.2 / 2023: -99.3 - (In percent of GDP): 2022: -6.7% / 2023: -4.9% - Overall balance2: 2022: -126.0 / 2023: 4.8 - Change in gross official reserves (increase: +): 2022: -50.0 / 2023: 55.9 - Financing gap (1): 2022: -76.0 / 2023: -51.0 - Expected budget support (2): 2022: 63.5 / 2023: 45.0 - World Bank: 2022: 30.5 / 2023: 25.0 - African Development Bank: 2022: 20.0 / 2023: 20.0 - Residual Financing gap (1+2): 2022: -12.5 / 2023: -6.0 - Change in liabilities to IMF, net: 2022: 12.5 / 2023: 6.0 - EFF Purchases: 2022: 17.5 / 2023: 17.3 - Repurchases: 2022: 5.0 / 2023: 11.2 ### Fiscal performance, measures, and medium-term priorities - Fiscal outturns and 2023 budget measures: - Primary deficit in 2022 expected to be contained at 1.1 percent of GDP (compared to 1.4 percent of GDP at the second review). - Draft 2023 budget revenue-side tax measures: - Domestic minimum tax on turnover of large hotels: 162.0 SCR million, 0.5% of GDP. - Nightly environmental charge for tourists: 118.0 SCR million, 0.4% of GDP. - Reform of business tax on securities dealers (from 1.5% to 3%): 219.5 SCR million, 0.7% of GDP. - Total revenue-side measures: 499.5 SCR million, 1.6% of GDP. - Expenditure-side measures: - Public Sector Reforms: 255.1 SCR million, 0.8% of GDP. - Increase in Retirement Age to 65 yielding savings: 47.8 SCR million, 0.16% of GDP. - Combined expenditure-side measures: 302.8 SCR million, 1.0% of GDP. - Total fiscal measures in 2023: 802.3 SCR million, 2.6% of GDP. - Primary balance expected to shift to a surplus of 1.1 percent of GDP in 2023 (compared to 1.7 percent of GDP envisaged at the time of the second review). - Social spending projected at 7.3 percent of GDP in 2023. - Debt dynamics and GFNs: - Public debt declined from 88.7 percent of GDP in 2020 to 67.9 percent in 2022. - Debt-to-GDP ratio projected to decline to 64.6 percent in 2023 and below 50 percent by 2026; projected 44.1 percent of GDP by 2027. - Gross financing needs (GFNs) projected to decline from 32 percent of GDP in 2021 to 14 percent in 2023. - Medium-term fiscal orientation: - Authorities aim to increase revenues from 32.5 percent of GDP in 2022 to about 34 percent of GDP in the medium term based on 2023 reforms. - Capital expenditure planned at around 6 percent of GDP through the medium term (compared to 4 percent of GDP in 2022). - Public Investment Management Assessment (PIMA) planned for January 2023; Climate Change PIMA (C-PIMA) also planned. ### Monetary policy, liquidity, and credit - Monetary stance and key rates: - Monetary Policy Rate (MPR): 2.0 percent. - Interest on Standing Deposit Facility (SDF): 0.5 percent. - Interest on Standing Credit Facility (SCF): 3.5 percent. - Minimum Reserve Requirement (MRR) on rupee deposits increased from 10 percent to 13 percent effective July 13, 2022; MRR on foreign currency deposits unchanged at 13 percent. - Liquidity and credit transmission: - Excess reserves held at CBS at end-September 2022 amount to 5.5 percent of banks’ assets. - Credit growth to the private sector projected at 3.3 percent in 2022; private sector credit (percent change) projected: 2023: 10.5; 2024: 9.3. - CBS committed to IMF TA recommendations: mop up liquidity via reserve requirements and liquidity-absorbing operations, issue securities and increase deposit auctions, and develop money and FX markets. - Transition to full-fledged inflation targeting: CBS to gradually enhance transparency and implement an inflation expectations survey with NBS support. - Exchange rate policy: - CBS committed to a floating exchange rate and will intervene only to facilitate orderly market conduct. ### Financial stability, banking sector, and market development - Banking sector soundness: - Regulatory capital to risk-weighted assets around 20.7 percent (aggregated); regulatory capital around 21 percent in August 2022. - NPLs increased: example series report NPLs to gross loans ranged up to 7.3 in 2022; in monthly reporting NPLs rose by SCR320 million year-on-year to SCR797 million as at end-July 2022. - Provisioning increased to 8.1 percent of gross loans from 5.1 percent; provisioning level for NPLs reported at 25 percent. - Resolution, supervision, and reforms: - CBS will require viable but undercapitalized banks to submit capital plans; nonviable institutions to be resolved using appropriate resolution tools. - Draft Bank Resolution Bill expected to be approved by Cabinet by end-September 2023 (structural benchmark). - CBS to submit amendments to the CBS Act to Cabinet by May 2023 to strengthen governance and autonomy. - Market development: - Shift toward local currency bond issuance; holdings of T-bills declined from 10 percent of bank assets in end-2020 to 3 percent by end-August 2022; share of bonds increased from 3 percent to 12 percent during same period. - From 2025, net domestic financing projected to turn negative, requiring adequate securities for monetary policy conduct. - Annual Borrowing Plan published (ABP – structural benchmark end-September 2022); Medium-Term Debt Strategy (MTDS) planned by end-December 2022. - Policy framework for a secondary market mechanism for government securities expected by March 2023 (structural benchmark reset). ### Governance, transparency, and SOE reforms - Beneficial ownership and IBCs: - As of end-August 2022, 90 percent of more than 53,000 IBCs in good standing had submitted BO information to the BO database since July 2021. - FIU assessment revealed discrepancies; one case matched an international sanctions list and the IBC was struck off the register on 8th September 2022. - NAC and FIU to draft amendments to the BO Act by end-December 2022; FSA to publish a report on resident agents’ compliance by end-January 2023. - SOE governance and Air Seychelles: - Transfers to SOEs reduced from 2.0 percent of GDP in 2020 to 0.1 percent forecast for 2023. - Public Enterprise bill gazetted in October 2022; PEMC to publish Public Enterprises' Annual Report (structural benchmark end-June 2023). - Air Seychelles restructuring: agreement with bondholders for a 66.7 percent nominal haircut on US$83 million obligations in May 2022; Government took a USD 13 million loan from TDB to repay Etihad liabilities; Government to repay principal over two years with Air Seychelles servicing interest. - Operational restructuring and ring-fencing ground handling targeted by end-December 2022 (structural benchmark). - SOE audits and PEMC: - PEMC to conduct governance audits and operational assessments in two phases: Phase 1 by June 2023 (PUC and SEYPEC); Phase 2 by December 2023 (Air Seychelles, IDC, STC). ### Tax policy, revenue administration, and digitalization - Tax and revenue measures: - Business tax reforms: unified business tax rate at 25 percent from January 1, 2022 (tourism, fishery and agriculture benefit from a lower 15 percent profit tax rate). - Turnover tax of 2 percent on large hotels from January 2023; environmental tourist tax per night from April 2023. - Expected additional revenue from reform measures: 1.4 percent of GDP in 2023. - Tax administration modernization: - Tax Management System (TMS) rollout schedule: - Registration – End of October 2022 - Core modules – June 2023 - Non-core modules – June 2024 (extension possible to December 2024 pending EU approval) - Amnesty outcomes: registration of 52 new businesses; submission of 4,637 outstanding returns; collection of SR 297.7 million. - SRC to implement Compliance Improvement Plan starting January 2023. - Customs and ASYCUDA enhancements: - ASYCUDA modules and timelines: Express Courier and Manifest developed; Tariff 2022 to go live by end of October 2022; E-Payment module estimated completion Q3 2023; Excise Warehouse testing Q1 2023; Single Window by Q2 2024. - International taxation and digital challenges: - Work with OECD on two-pillar approach and implement VAT on digital platforms; technical assistance and capacity building for transfer pricing and exchange of information. ### Climate, energy transition, and strategic sectors - Climate and energy targets: - Long-term decarbonization objective by 2050. - Updated NDC (July 2021) and targets: - Economy-wide absolute GHG emissions reduced by 293.8 ktCO2e in 2030 (26.4 percent) compared to BAU. - Target: 30 percent of gasoline private vehicles to be electric by 2030. - Energy Efficiency improvement level of 15 percent by 2030. - IRP procurement and energy policy revision expected by end of 2023. - Climate adaptation and investment priorities: - Coastal erosion protection plan, Blue Carbon roadmap, climate financing framework. - Climate Public Investment Management Assessment (C-PIMA) TA mission in January 2023. - Agriculture and food security: - Target to build a strategic food reserve for a minimum period of six months. - Cold storage facility project due for completion in 2023; financing for dry storage facility being sought. ### Risk Assessment Matrix — selected entries - Conjunctural risks (selected): - Intensifying spillovers from Russia’s war in Ukraine: Relative Likelihood: High; Expected Impact if Realized: High. Policy response: develop contingency plan; consider further fiscal consolidation and reliance on concessional financing. - Protracted delay in tourism arrivals from main European countries: Relative Likelihood: High; Expected Impact if Realized: High. Policy response: contingency planning; fiscal consolidation; reliance on concessional financing. - Commodity price shocks: Relative Likelihood: High; Expected Impact if Realized: Medium. Policy response: CBS vigilance and readiness to tighten monetary stance; enhance targeted support effectiveness. - Higher NPL levels: Relative Likelihood: Medium; Expected Impact if Realized: Medium. Policy response: prudent loan restructuring, strengthened monitoring, detailed reporting templates. - Local Covid-19 outbreaks: Relative Likelihood: Medium; Expected Impact if Realized: Medium. Policy response: rely on concessional financing; optimize debt portfolio; adjust public investment. - Structural risks: - Natural disasters related to climate change: Relative Likelihood: Medium; Expected Impact if Realized: Medium. Policy response: prioritize implementation of climate projects. *Source: International Monetary Fund — SEYCHELLES: THIRD REVIEW UNDER THE EXTENDED FUND FACILITY ARRANGEMENT AND REQUEST FOR MODIFICATION OF INDICATIVE TARGETS — Executive Summary and selected sections (1sycea2022006).* ### 5.4 percent in 2023. Inf lation has been relatively low (3.0 percent year-on-year at end- ### 1sycea2022006 - 5.4 percent in 2023. Inf lation has been relatively low (3.0 percent year-on-year at end- ### Context and recent developments - Tourism is driving a strong economic recovery: Real GDP growth is expected to accelerate to 10.6 percent in 2022, up from 7.9 percent in 2021. - Tourist arrivals reached 241,204 at end-September 2022, a 125 percent increase over the same period in 2021. - Tourism-related industries account for 20.9 percent of GDP and 26.7 percent of employment. - Average employment increased by 4.5 percent between Q2 2021 and Q2 2022; non-tourism sector employment gains were 1.5 percent from Q2 2021 to Q2 2022. - Inflation dynamics: - After averaging 9.8 percent in 2021, year-on-year inflation declined to 3.0 percent at end-September 2022. - The monetary policy rate remained unchanged at 2 percent since mid-2021. - External position and reserves: - Gross international reserves (GIR) increased to US$702 million (3.7 months of imports) but declined to US$640 million at end-September 2022 (3.2 months of imports). - Currency appreciation during January-September 2022: NEER up 13.4 percent, REER up 14.3 percent, and appreciation of 2 percent versus the US dollar. - Fiscal consolidation and debt: - Primary fiscal balance reached a surplus of 2.1 percent of GDP at end-June 2022 (projected primary fiscal deficit in 2022 is expected to narrow to 1.1 percent of GDP in some projections reported). - Public debt-to-GDP ratio projected at around 68 percent at end-2022 in some summaries; debt-to-GDP ratio fell to 63.0 percent at end-September 2022 (a 10-percentage-point reduction since end-June 2021). - Consolidation described as an extraordinary consolidation of 13.6 percentage points over the last two years, with a 21-percentage-point reduction in public debt-to-GDP over two years in some statements. - Financial sector: - Non-performing loans (NPLs) doubled to 8 percent in August 2022 from 4 percent in August 2021, mainly due to withdrawal of forbearance measures in February 2022. - Regulatory capital around 21 percent of risk-weighted assets in August 2022. - Provisioning for the banking sector increased to 8.1 percent of gross loans from 5.1 percent during the same period; provisioning level for NPLs is 25 percent of NPLs noted elsewhere. ### Outlook and risks - Growth projections: - Real GDP growth: 10.6 percent in 2022, moderating to 5.4 percent in 2023 and about 4 percent over the medium term. - Inflation projections: - Average inflation projected to decline to 3.0 percent for 2022, before rising to 4.5 percent in 2023. - Drivers: higher import prices and fading of the cushion provided by the lagged effect of the rupee appreciation. - Current account: - Current account deficit expected to narrow to 6.7 percent of GDP in 2022 and 4.9 percent of GDP in 2023. - Downside and medium-term risks: - Worsening prospects in key tourist markets: Russia, the European Union, and the United Kingdom. - High food and fuel prices and their effect on the most vulnerable. - Resurgence of COVID-19. - Higher-than-expected inflation. - Higher NPLs from legacy forborne loans. - Climate-related shocks (coastal erosion, electricity generation and distribution, waste management) as medium- and long-term risks. - Policy response considerations if risks materialize: - Maintain a flexible exchange rate. - Consider further fiscal measures, including appropriate revenue and expenditure measures. - Protect the most vulnerable through targeted support. ### Program performance - Program implementation: - All end-June 2022 quantitative performance criteria (QPCs) and indicative targets (ITs) as well as all end-September 2022 ITs were met. - Seven out of nine structural benchmarks (SBs) assessed for this review have been met or implemented with delay. - The end-September SB on publication of a new medium-term debt management strategy was not implemented; expected publication in December 2022 when the underlying medium-term budget framework is finalized. - The SB on streamlining VAT exemptions was not met; Fund technical assistance delivered in September 2022, and streamlining can take place no earlier than December 2023. - New structural benchmarks added on SOEs transparency and economic impact analysis for the tourism sector. ### Key fiscal and social measures - Fiscal consolidation: - The primary fiscal deficit in 2022 is expected to narrow to 1.1 percent of GDP (document also reports a primary surplus of 2.1 percent of GDP at end-June 2022 in fiscal outturns). - Extraordinary consolidation of 13.6 percentage points over the last two years reported. - Public debt-to-GDP ratio expected to decline to about 68 percent at end-2022 in some statements and reported at 63.0 percent at end-September 2022 in fiscal accounts. - The weighted average cost of borrowings in the domestic market declined by more than 2 percentage points year-over-year during January-September 2022. - Social protection: - Targeted, temporary cash transfers provided to protect the most vulnerable from rising food and fuel prices; program expected to run through early 2023. - Medium-term fiscal orientation: - Primary balance projected to shift to a surplus in 2023 and over the medium term as revenue measures are expected to more than compensate for planned increase in capital expenditure. - Authorities aim to increase revenues and bolster capital expenditure with a focus on climate-change mitigation and adaptation. ### Policy priorities and reform agenda - Near-term priorities: - Support the post-pandemic recovery. - Maintain debt sustainability. - Address impacts of rising food and fuel prices on the most vulnerable. - Medium-term priorities: - Increase revenues. - Bolster capital expenditure, focusing on climate-change mitigation and adaptation. - Structural reform priorities: - Revenue administration. - Public financial management. - Governance, including digitalization. - State-owned enterprise (SOE) reform. - Monetary policy: - Maintain accommodative stance while monitoring inflation and currency movements; monetary policy rate unchanged at 2 percent since mid-2021. - Debt management and financial stability: - Publish medium-term debt management strategy (delayed to December 2022). - Continue monitoring NPLs and provisioning; banking system remains adequately capitalized. *International Monetary Fund. SEYCHELLES: THIRD REVIEW UNDER THE EXTENDED FUND FACILITY ARRANGEMENT AND REQUEST FOR MODIFICATION OF INDICATIVE TARGETS — Executive Summary and selected sections (as provided).* ### 11. Fiscal overperformance continued in 2022, allowing for a faster fiscal consolidation ### 11. Fiscal overperformance continued in 2022, allowing for a faster fiscal consolidation ### Fiscal performance and near-term outlook - Primary deficit in 2022 is expected to be contained at 1.1 percent of GDP (compared to 1.4 percent of GDP at the second review). - Faster consolidation driven by lower-than-projected expenditures, including social expenditures. - Targeted, temporary cash transfers to protect the most vulnerable from rising food and fuel prices began later than expected and will run from August 2022 through the first quarter of 2023. - In August 2022, 7.7 million rupees out of an initial budget of 80 million rupees (0.2 percent of GDP) had been spent. - Shortfalls in external financing led to lower capital expenditure than budgeted in 2022. ### External grants, capital expenditure, and budget adjustments - Prospects for external grants are weaker than anticipated, prompting adjustments for 2022 and 2023 without compromising debt sustainability or increasing financing needs. - Some capital expenditures planned for 2022 delayed to 2023 pending receipt of grant financing. - An increase in domestically financed capital expenditure in 2022 partially offsets the drop in foreign-financed capital expenditure, but overall capital expenditure remains under-executed in 2022. - Grants for 2023 are expected to be 1.3 percent of GDP smaller than anticipated at the time of the second review, prompting budget adjustments while maintaining debt on a downward path and keeping gross financing needs unchanged in 2022 and 2023 relative to the second review. ### 2023 budget measures and fiscal projections - Draft 2023 budget introduces three new tax measures: - Domestic minimum tax applied on the turnover of large hotels: 162.0 SCR million, 0.5% of GDP. - Nightly environmental charge for tourists, based on hotel room nights: 118.0 SCR million, 0.4% of GDP. - Reform of business tax on securities dealers (from 1.5% to 3%): 219.5 SCR million, 0.7% of GDP. - Total revenue-side measures: 499.5 SCR million, 1.6% of GDP. - Expenditure-side measures: - Public Sector Reforms: 255.1 SCR million, 0.8% of GDP. - Increase in Retirement Age to 65 yielding savings: 47.8 SCR million, 0.16% of GDP. - Combined expenditure-side measures: 302.8 SCR million, 1.0% of GDP. - Total fiscal measures in 2023: 802.3 SCR million, 2.6% of GDP. - Primary balance expected to shift to a surplus of 1.1 percent of GDP in 2023 (compared to 1.7 percent of GDP envisaged at the time of the second review). - Reduction of the surplus relative to the second review driven mainly by expected decline in capital grants and partial substitution by domestic financing, and by shifting some capital expenditures from 2022 to 2023. - Public sector reforms and increase in retirement age starting 2023 will yield savings of 1.0 percent of GDP in 2023 relative to the no-reform baseline. - Social spending across various programs projected at 7.3 percent of GDP in 2023. ### Debt dynamics and gross financing needs (GFNs) - Public debt declined from 88.7 percent of GDP in 2020 to 67.9 percent in 2022 (compared with 87.6 percent envisaged in the original program). - Debt-to-GDP ratio projected to decline to 64.6 percent in 2023 and below 50 percent by 2026; projected to decline to 44.1 percent of GDP by 2027. - Gross financing needs (GFNs) projected to decline from 32 percent of GDP in 2021 to 14 percent in 2023 (compared with 16 percent envisaged in the original program), though slightly higher over the medium term due to weaker external grants. - Risks to the outlook include the war in Ukraine, possible resurgence of Covid, and vulnerability to climate change. - Recommendation: rely as much as possible on concessional financing and optimize the debt portfolio. ### Contingent liabilities and Air Seychelles - Large haircut on debt in May 2022 and operational restructuring to be completed by December 2022 (structural benchmark for December 2022) reduced medium-term contingent fiscal risks from Air Seychelles. - Agreement with bondholders for a 66.7 percent nominal haircut on US$83 million obligations. - Air Seychelles took a commercial loan to pay off remaining obligations; Government paid off its remaining US$13 million obligation using a two-year commercial loan, with Air Seychelles responsible for interest payments. - Operational challenge: ensure Air Seychelles runs sustainably so operational losses do not re-accumulate and debt does not re-emerge. - Recommendation: resume publication of an annual report on SOE balance sheets (new structural benchmark for June 2023, MEFP para 43) and gradually enhance it to provide an overall assessment of fiscal risks from SOEs. ### Medium-term fiscal priorities and revenue mobilization - Authorities committed to improving revenue performance; revenues set to rise from 32.5 percent of GDP in 2022 to about 34 percent of GDP in the medium term based on 2023 reforms. - Challenge: better identify the economic contribution of tourism and ensure a commensurate contribution to tax revenue, given much value-added from tourism accrues abroad. - Authorities to conduct an economic impact analysis on tourist receipts and prepare terms of reference by June 2023 (new structural benchmark). - VAT reform: set up a medium-term plan to reform VAT policy and streamline exemptions where impact on the most vulnerable is negligible (MEFP para 36). - Work with OECD on the two-pillar approach to address tax challenges from digitalization; improve implementation of VAT on digital platforms and digital services. - Tax administration reforms: digitalization initiatives, stronger compliance monitoring, and upgrade in the ASYCUDA system at Customs. ### Public investment, PIMA, and climate focus - Authorities committed to increasing capital expenditure with a focus on climate and the environment. - Capital expenditure planned at around 6 percent of GDP through the medium term (compared to 4 percent of GDP in 2022). - Public Investment Management Assessment (PIMA) planned for January 2023 to identify opportunities to increase efficiency of public investment and scope for procurement to support PPPs; combined with a Climate Change PIMA (C-PIMA). - Strengthening Treasury cash management: ministerial circular issued in October 2022 to reduce deviations from the monthly cash flow plan (structural benchmark). ### Monetary and exchange rate policy - Monetary policy stance to remain on hold given relatively contained inflation; CBS should remain vigilant and ready to tighten if needed. - Current stance considered appropriate given benign inflation and weak private credit growth, to avoid hampering recovery. - CBS adopted a forward-looking approach to anchor inflation expectations; plans to implement an inflation expectations survey with National Bureau of Statistics support. - CBS committed to a floating exchange rate and will only intervene to facilitate orderly market conduct (MEFP para 50). ### Private credit and monetary transmission - Revival in private credit necessary for a broad-based recovery beyond tourism. - Credit growth to the private sector projected at 3.3 percent in 2022, expected to pick up in 2023 and beyond. - Excess reserves of the banking system held at CBS at end-September 2022 amount to 5.5 percent of banks’ assets. - Strengthening monetary policy transmission requires mopping up excess reserves in a phased manner. - CBS committed to IMF TA recommendations: mop up liquidity via reserve requirements and liquidity-absorbing operations (issuance of securities and higher volume of deposit auctions) and develop money and FX markets (MEFP para 51). - With transition to full-fledged inflation targeting, CBS to gradually enhance transparency of monetary policy framework to strengthen transmission and dialogue. ### Debt management strategy and market development - Shift toward a primary surplus requires greater coordination between debt management and monetary policy. - Continued shift toward local currency bond issuance and reduction of T-bills to reduce refinancing risks, while maintaining sufficient T-bills for banks’ liquidity management. - Holdings of T-bills declined from 10 percent of bank assets in end-2020 to 3 percent by end-August 2022; share of bonds increased from 3 percent to 12 percent during same period. - From 2025, net domestic financing will turn negative, requiring CBS to have adequate securities for regular conduct of monetary policy. - Authorities published an Annual Borrowing Plan (ABP – structural benchmark for end-September 2022) and plan to publish a Medium-Term Debt Strategy (MTDS) by end-December 2022 (structural benchmark). - Policy framework for a secondary market mechanism for government securities expected by March 2023 (structural benchmark reset from December 2022) to support a greater supply of bonds and allow redemption prior to maturity. - Recommendation: repeal law requiring Presidential approval for specific bond issuances and align with approval of summary bond issuance program in the ABP to provide more flexibility. - Authorities exploring diversification of financing options including Eurobonds and sovereign ESG bonds. ### Financial stability and macroprudential framework - Unwinding of forbearance measures necessitates enhanced CBS surveillance to mitigate financial stability risks from higher NPLs. - Recent increase in NPLs mainly from loans subject to forbearance during the pandemic; a significant portion of performing loans were previously forborne. - Despite increase in NPLs, capital adequacy across the banking sector remains high. - Study on impact of unwinding forbearance completed (structural benchmark for end-September 2022); further work needed to strengthen the study including forward-looking analysis to ensure adequate provisioning and capitalization. - Progress on legal framework for financial stability and crisis management: - Cabinet approved draft policy paper on Financial Stability Bill in March 2022; steps taken to enhance macroprudential toolkit (MEFP, para 63). - Draft policy paper on Bank Resolution Bill submitted for Cabinet approval in October 2022 (structural benchmark delayed from end-July 2022); enhancements expected on funding mechanisms, NCWOL principle, and cross-border resolution with IMF technical assistance and US Treasury support. *Source: 1sycea2022006 (IMF staff report excerpt).* ### 29. Upgrading the financial market infrastructure will be required to support greater ### 29. Upgrading the financial market infrastructure will be required to support greater ### Financial market infrastructure and digitalisation - A move to development of a Real Time Gross Settlement System and a Central Security Depository by the authorities would support a safe, secure and efficient system of settlement of transactions and securities. - Embedding new technologies and digital products within the financial system, including the payments system, will support financial market development and enhance financial inclusion (MEFP para 17). ### Financial stability, supervision, and resolution - The authorities remain committed to strengthening the financial stability and crisis management framework. - CBS will take relevant and timely enforcement actions where necessary to ensure the effectiveness of its risk based supervisory process. - Within CBS’ usual regulatory framework: - viable but undercapitalized banks would be required to submit capital plans; - nonviable financial institutions would be resolved using the appropriate resolution tools. - The authorities would depend on continued IMF technical assistance support in the areas of financial stability and bank resolution to ensure a stable and well capitalized banking system (MEFP para 63). - CBS will, in consultation with IMF, submit amendments to the CBS Act to Cabinet by May 2023 to: - (i) strengthen governance and oversight; - (ii) enhance institutional and personal autonomy; and - (iii) safeguard financial autonomy. - The draft Bank Resolution Bill is expected to be approved by Cabinet by end-September 2023 (structural benchmark). ### Governance and transparency — Beneficial ownership (BO) and IBCs - As of end-August, 90 percent of the more than 53,000 IBCs in good standing had submitted information to the BO database since it became operational in July 2021. - The Financial Intelligence Unit (FIU) submitted to the National AML/CFT Committee (NAC) an assessment report, which provides statistics on the BO database, and identifies discrepancies in the submitted information. - In one case, verification of the BO information by the FIU revealed a match with an international sanctions list, and the IBC was struck off the register by the Financial Services Authority (FSA). - The FIU will continue to report statistics on the BO database on a quarterly basis. - The authorities will ensure that the FIU has effective access to all relevant databases to facilitate verification of BO information and will establish mechanisms for processing reports of discrepancies. - Progress in facilitating international cooperation and information sharing will further contribute to addressing the money laundering, terrorist financing, and reputational risks associated with IBCs in Seychelles (MEFP para 71). ### BO legal framework and compliance actions - The authorities have committed to verify the adequacy, accuracy, and timeliness of BO information in the database. - The NAC has requested technical assistance from the European Union AML/CFT Global Facility to amend the BO Act. - The NAC and FIU aim to finish drafting the amendments to the BO legal framework by end-December 2022. - These amendments will address gaps identified in the FIU assessment report, and ensure the effectiveness of the BO regime, including enhancing sanctions for non-submission, false BO information, and other violations. - The FSA is conducting targeted risk-based AML/CFT inspections of licensed resident agents with respect to compliance with collecting BO information from IBCs and will publish by end-January 2023 a report on its findings, including statistics on compliance, enforcement actions and sanctions (MEFP para 69). ### Public spending transparency and audit follow-up - The authorities completed and published an audit of COVID-related emergency spending in June 2022. - The audit reported shortcomings in the emergency procurement framework; the authorities plan to update the emergency procurement framework in 2023. - The audit found instances of inadequate assessment of applications and non-application of established criteria in the administration of the Financial Assistance for Job Retention (FA4JR) scheme, resulting in overpayments. - The authorities have started to address shortcomings, including applying more stringent criteria to assess eligibility for targeted, temporary cash transfers to help the most vulnerable cope with rising food and fuel prices. ### Climate challenges and initiatives - Seychelles places climate change at the center of its sustainable development strategy. - Major climate initiatives include the coastal erosion protection plan, Blue Carbon roadmap, and climate financing framework (MEFP para 10-12). - Authorities are exploring options to capitalize on “blue economy” environmental assets that may provide global public goods with respect to the climate. - Seychelles updated its Nationally Determined Contribution in July 2021. - A key priority is to establish a unifying body to prioritize and oversee the management and implementation of various climate change initiatives, including transparency and accountability mechanisms. - The authorities have expressed interest in the Resilience and Sustainability Trust (RST); discussions focused on timing relative to the EFF and potential reform measures that could underpin a future RST program. - The authorities will benefit from a climate Public Investment Management Assessment (C-PIMA) technical assistance mission in January 2023. ### Data issues and statistical capacity - Data are broadly adequate for program purposes, with room for improvement in certain areas. - IMF and AFRITAC South (AFS) technical assistance has supported the National Bureau of Statistics (NBS) to rebase annual GDP estimates at current and constant prices and to improve quarterly GDP estimates, while addressing inconsistencies between the expenditure-side GDP series and the Balance of Payments for tourism receipts. - Backcasting the GDP series is currently underway with AFS support. - AFS is supporting the NBS to improve the Producer Price Index (PPI). - IMF technical assistance was provided to the CBS to improve external sector statistics, in particular on estimation of tourism earnings and identification of cross-border transactions and positions by special purpose entities in Seychelles. - The IMF and AFS will continue to provide TA to the NBS and the CBS as needed. - Implementation of the 2021 safeguards assessment recommendations has progressed in most areas except on amending the CBS Act. - The authorities are committed to submit to Cabinet by May 2023 (structural benchmark), in consultation with IMF staff, the amendments aimed to, inter alia, strengthen governance and oversight, enhance institutional and personal autonomy, and safeguard financial autonomy. ### Program modalities, performance, and financing - Program implementation remains strong. - All end-June 2022 QPCs and ITs as well as end-September ITs were met. - Seven out of the nine SBs assessed for this review have been met or implemented with delay. - Two end-September SBs were not met: - the SB on the publication of a new medium-term debt management strategy was reset for December 2022—after the underlying medium-term budget framework is finalized; - the SB on streamlining VAT exemptions was postponed pending further Fund TA. - New QPCs and ITs are proposed for March and June 2023 along with new structural benchmarks. - Staff support requests to modify the end-March 2023 and end-June 2023 ITs and to modify the definition of the IT on the floor of governmental social spending in the TMU; the definition of social spending has been broadened to include programs previously classified as “wages and salaries” and “goods and services”. ### Financing outlook and reserves - The program remains fully financed. - There are firm financing commitments for the next 12 months and good prospects for the remainder of the program period. - International reserves are projected to record around 3.2 months of prospective imports by end-2022, supported by ongoing financial support from the Fund, and other IFIs (World Bank US$ 30.5 million; AfDB US$20 million, Trade and Development Bank US$13 million). - Reserves are expected to be equivalent to 4.6 months of imports over the medium term. - Seychelles: Financing Gap and Sources of Financing (Millions of US dollars, unless otherwise specified): - 2022 / 2023 - Current account balance: -131.2 / -99.3 - (In percent of GDP): -6.7% / -4.9% - Balance of goods and services: -8.7 / 23.3 - Balance on primary income: -89.8 / -97.7 - Balance on secondary income: -32.6 / -24.9 - Capital account, net: 5.6 / 9.2 - Financial account, net1,2: 0.4 / -94.9 - Direct investment, net: -275.7 / -266.3 - Portfolio investment, net: 15.5 / 19.0 - Other investment, net2: 260.6 / 152.4 - SDR allocation: - / - - Overall balance2: -126.0 / 4.8 - Change in gross official reserves (increase: +): -50.0 / 55.9 - Financing gap (1): -76.0 / -51.0 - (In percent of GDP): -3.9% / -2.5% - Expected budget support (2): 63.5 / 45.0 - World Bank: 30.5 / 25.0 - African Development Bank: 20.0 / 20.0 - Others: 13.0 / 0.0 - Residual Financing gap (1+2): -12.5 / -6.0 - Change in liabilities to IMF, net: 12.5 / 6.0 - EFF Purchases: 17.5 / 17.3 - (In percent of GDP): 0.9% / 0.9% - Repurchases: 5.0 / 11.2 - Notes: - 2 Excluding expected budget support, therefore different from BOP. - 1 Per STA recommendations, net lending under financial account is recorded as positive following BPM6 guidance. - Source: Authorities and IMF staff estimates. ### Capacity to repay and risk assessment - Seychelles’ capacity to repay the Fund is adequate, but subject to risks. - The economic recovery in 2021 and early 2022 has generated significant repayment capacity. - The Fund credit-to-GDP ratio will peak at 6.8 percent in 2023. - The Fund credit to GIR ratio is projected to peak at 20.2 percent in 2022. - Key risks to repayment capacity arise from uncertainty about the adverse impact of the war in Ukraine on the global economy, especially the tourism industry and commodity prices. ### Staff appraisal — Outlook, inflation, and policy recommendations - Real GDP growth outlook for 2022 is 10.6 percent, driven by tourism sector recovery with tourism arrivals expected near pre-pandemic levels. - The economy is expected to continue its rebound in 2023, though at a slower pace: 5.4 percent. - Inflation was relatively contained in 2022 but is expected to accelerate in 2023 as the effects of the rupee appreciation in 2021 and forward fuel purchases fade. - Staff supports authorities’ vigilance against inflation risks and readiness to tighten the monetary policy stance if needed. - The accommodative monetary policy stance remained unchanged since 2020; staff support a proactive and forward-looking response if inflationary pressures emerge. - The exchange rate should continue being used as a shock absorber, with foreign exchange interventions limited to smoothing out disorderly exchange rate fluctuations. - Authorities remain committed to reducing debt vulnerabilities and fiscal risks; fiscal consolidation is expected to continue at a strong pace in 2022 and 2023 and gross financing needs remain on a firm downward path over the medium term. - The debt-to-GDP ratio is expected to decline below 50 percent of GDP by 2026. - Risks to the outlook remain high, including: - intensification of spillovers from Russia’s war in Ukraine and worse economic prospects in key tourism markets (Russia, the European Union, and the United Kingdom); - a resurgence of COVID-19; - higher NPLs from legacy forborne loans; - climate change over the medium and long term. - Financial sector assessment: - NPLs have increased, mainly due to the withdrawal of forbearance measures in February 2022. - The banking system remains adequately capitalized. - Credit growth remains weak but there are signs of recovery in local currency lending; foreign currency lending contracted moderately. - Governance progress: - Authorities have taken steps to improve transparency of BO information, including IBCs. - Amendments to the BO Act should ensure BO information is accurate, adequate, up-to-date, and effectively accessible by competent authorities. *International Monetary Fund — Seychelles staff report excerpt.* ### 48. Staff supports the authorities’ request for completion of the third review under the ### 1sycea2022006 - 48. Staff supports the authorities’ request for completion of the third review under the ### Program support and staff assessment - Staff supports the authorities’ request for completion of the third review under the Extended Fund Facility. - Staff supports the authorities’ request for modification of March and June 2023 ITs. - The attached Letter of Intent and Memorandum of Economic and Financial Policies set out appropriate policies to pursue program objectives. - The capacity to repay the Fund is adequate but subject to high risks, and risks to program implementation are manageable. ### Macroeconomic developments and projections - Real GDP (millions of Seychelles rupees): 2020: 20,196; 2021: 21,792; 2022: 24,111; 2023: 25,406; 2024: 26,386; 2025: 27,442; 2026: 28,551; 2027: 29,718. - Real GDP growth (annual percent change): 2020: -7.7; 2021: 9.9; 2022: 10.6; 2023: 5.4; 2024: 3.9; 2025: 4.0; 2026: 4.0; 2027: 4.1. - CPI (annual average): 2020: 1.2; 2021: 9.8; 2022: 3.0; 2023: 4.5; 2024: 3.8; 2025: 3.5; 2026: 3.3; 2027: 3.0. - GDP deflator average: 2020: 1.8; 2021: .7; 2022: 2.0; 2023: 4.2; 2024: 3.6; 2025: 3.2; 2026: 3.2; 2027: 2.9. - Private sector credit (percent change): 2020: 20.2; 2021: -11.9; 2022: 3.3; 2023: 10.5; 2024: 9.3; 2025: 7.8; 2026: 7.6; 2027: 7.3. - Key narrative points illustrated in staff charts: V‑shape recovery in the economy followed by new shocks; recent appreciation partly offset the 2020 depreciation; reserves reduced slightly due to higher demand for FX for imports; fiscal policy mitigates surge in commodity prices while preserving debt sustainability; private sector credit reflects currency movements; strong recovery in tourism improved external balance. ### Fiscal outlook and public finances - Nominal GDP (millions of Seychelles rupees): 2020: 22,211; 2021: 24,611; 2022: 27,785; 2023: 30,495; 2024: 32,825; 2025: 35,238; 2026: 37,822; 2027: 40,503. - Total revenue, excluding grants (percent of GDP): 2020: 32.2; 2021: 31.2; 2022: 32.5; 2023: 33.8; 2024: 34.5; 2025: 34.2; 2026: 34.4; 2027: 34.2. - Expenditure and net lending (percent of GDP): 2020: 51.5; 2021: 40.0; 2022: 36.5; 2023: 36.8; 2024: 34.7; 2025: 32.8; 2026: 32.6; 2027: 32.0. - Overall balance, including grants (percent of GDP): 2020: -18.4; 2021: -5.6; 2022: -3.3; 2023: -1.8; 2024: 0.4; 2025: 2.2; 2026: 2.7; 2027: 3.0. - Primary balance (percent of GDP): 2020: -14.7; 2021: -3.0; 2022: -1.1; 2023: 1.1; 2024: 2.2; 2025: 3.5; 2026: 3.6; 2027: 3.6. - Total government and government‑guaranteed debt (percent of GDP): 2020: 88.7; 2021: 76.2; 2022: 67.9; 2023: 64.6; 2024: 60.3; 2025: 55.3; 2026: 49.7; 2027: 44.1. ### External sector and reserves - Current account balance including official transfers (percent of GDP): 2020: -13.7; 2021: -10.5; 2022: -6.7; 2023: -4.9; 2024: -4.5; 2025: -4.8; 2026: -7.1; 2027: -7.9. - Total external debt outstanding (millions of U.S. dollars): 2020: 5,049; 2021: 5,261; 2022: 5,301; 2023: 5,413; 2024: 5,499; 2025: 5,634; 2026: 5,750; 2027: 5,879. - Total external debt (percent of GDP): 2020: 400.1; 2021: 361.1; 2022: 270.9; 2023: 267.0; 2024: 252.3; 2025: 241.0; 2026: 230.0; 2027: 215.5. - Gross official reserves (end of year, millions of U.S. dollars): 2020: 575; 2021: 702; 2022: 652; 2023: 708; 2024: 796; 2025: 971; 2026: 1,086; 2027: 1,186. - Months of imports, c.i.f. (reserves coverage): 2020: 3.8; 2021: 3.7; 2022: 3.2; 2023: 3.4; 2024: 3.5; 2025: 4.0; 2026: 4.2; 2027: 4.6. - Reserves as percent of ARA metric: 2020: 111.3; 2021: 119.; 2022: 110; 2023: 108.; 2024: 116.2; 2025: 128.8; 2026: 153.7; 2027: 169.5; 2028: 182.5 (noting ARA data availability caveat). ### Public debt composition and debt service - Total public debt (US$ million) and composition snapshot (Table 8): Total: 2021: 1026.3; 2022: 1008.1; 2023: 1,314.9. - External debt (US$ million): 2021: 552.5; 2022: 553.8; 2023: 643.8. - Domestic debt (US$ million): 2021: 473.8; 2022: 46.2; 2023: 37.5 (as presented in the source table formatting). - Multilateral creditors (2021–23, US$ million examples): IMF: 2021: 54.1; 2022: 5.3; 2023: 4.3. World Bank: 69.7 (2021); AfDB: 64.3 (2021). - Domestic instruments (end‑period US$ million examples): T‑Bills 171.7 (2021); Bonds 229.3 (2021); Loans 72.8 (2021). - Public guarantees and contingent liabilities highlighted (Table 8): Domestic public guarantees reported as 37.6 (memo). ### Banking sector and financial soundness - Capital adequacy indicators (end‑period percent): Regulatory capital to risk weighted assets ranged around: 2020: 19.5; 2021: 17.1; 2022: 18.8–22.7 in reported months; Regulatory tier 1 to risk weighted assets around 16.8 down to 14.1 in 2020–2021 and back up to 18.8–17.0 in 2022. - Asset quality: Non‑performing loans to gross loans: ranged from 3.5 in 2018 to 7.3 in 2022 (reported series includes 7.3). - Profitability and margins: Return on assets (annualized) observed between 3.7 and 1.0 in 2018–2021 monthly observations; Return on equity (annualized) ranged from 35.7 to low‑20s to mid‑20s in 2019–2022 monthly observations. - Liquidity ratios: Core liquid assets to total assets around 45.2–33.3 in reported years; Broad liquid assets to total assets around 58.2–59.3. - Foreign exchange exposure: Total long position in foreign exchange to capital reported in monthly entries (e.g., 18. in a 2022 entry). ### IMF financing under the EFF and capacity to repay - Schedule of purchases under the EFF arrangement (Table 6): - July 29, 2021: SDR 24 million (104.8 percent of Quota) — Executive Board approval of the EFF arrangement. - December 1, 2021: SDR 24 million (104.8 percent of Quota) — Observance of end‑July 2021 performance criteria, and completion of the first review. - June 1, 2022: SDR 6.5 million (28.4 percent of Quota) — Observance of end‑December 2021 performance criteria, and completion of the second review. - December 1, 2022: SDR 6.5 million (28.4 percent of Quota) — Observance of end‑June 2022 performance criteria, and completion of the third review. - June 1, 2023: SDR 6.5 million (28.4 percent of Quota) — Observance of end‑December 2022 performance criteria, and completion of the fourth review. - December 1, 2023: SDR 6.5 million (28.4 percent of Quota) — Observance of end‑June 2023 performance criteria, and completion of the fifth review. - Total: SDR 74 million (323 percent of Quota). - Indicators of capacity to repay the Fund (Table 7 highlights): - Staff note: capacity to repay the Fund is adequate but subject to high risks. - Existing Fund credit (stock, end‑period, Millions of SDR): example entries include 2017: 29.3; 2018: 24.8; 2019: 19.7; 2020: 37.6; 2021: 81.6; 2022: 84.4 (source table provides detailed year series). - Stock of existing and prospective Fund credit (Millions of SDR) and ratios to quota, GDP, government revenues, exports of goods and services, and gross reserves are presented in Table 7 (detailed time series in source). *Source: IMF staff report and underlying tables and figures as provided in the content unit.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Conjunctural Risks - Intensifying spillovers from Russia’s war in Ukraine. - Relative Likelihood: High - Expected Impact if Realized: High - Policy Response: - Develop a contingency plan that would lower the impact of a delayed economic recovery: - Consider further fiscal consolidation and reliance on concessional financing in case such risk materializes. - Notes from source: - "Further sanctions resulting from the war and related uncertainties exacerbate trade and financial disruptions and commodity price volatility, with Europe, LICs, and commodity-importing EMs among the worst hit." - A protracted delay in tourism arrivals from the main European countries could hamper the planned tourism and economic recovery during 2022. - Relative Likelihood: High - Expected Impact if Realized: High - Policy Response: - Develop a contingency plan that would lower the impact of a delayed economic recovery: - Consider further fiscal consolidation and reliance on concessional financing in case such risk materializes. - Commodity price shocks. - Relative Likelihood: High - Expected Impact if Realized: Medium - Policy Response: - CBS to maintain vigilant monitoring and be ready to tighten monetary stance to anchor inflation expectations. - Enhance the effectiveness of the government’s planned targeted support for the most vulnerable population to deal with rising prices of a delayed economic recovery. - Mechanisms and channels described: - "Exchange rate-inflation pass-through is slow in Seychelles. However, sharper-than-anticipated increases in international energy prices raise the costs of energy imports and other imported goods." - "Higher food prices and/or supply disruptions would hurt vulnerable consumers (particularly low-income households)." - Higher NPL levels in the banking sector in Seychelles. - Relative Likelihood: Medium - Expected Impact if Realized: Medium - Policy Response: - Encourage and facilitate prudent restructuring of loans and enhance management and monitoring of NPLs. - Authorities should provide guidance on prudential treatment of moratoria and NPL management strategies, assess their implementation, and monitor the relevant reclassification of loans. - Authorities should further develop detailed reporting templates for restructured and rescheduled loans and for monitoring the impact of COVID-19 measures on the asset quality of banks. - Risk description: - "Higher NPLs levels in the banking sector which is currently not recognized due to the regulatory forbearance could escalate further in case the economic recovery falls short of expectations." - Local Covid-19 outbreaks. - Relative Likelihood: Medium - Expected Impact if Realized: Medium - Policy Response: - Rely as much as possible on concessional financing; optimize debt portfolio; adjust public investment level to reduce borrowing needs, if necessary. - Risk description: - "Outbreaks in slow-to-vaccinate countries or emergence of more contagious vaccine-resistant variants force new lockdowns or inhibit commerce. This results in extended supply chain disruptions, slower growth, capital outflows, and debt distress in some EMDEs." - "Low effectiveness in vaccines could further disrupt domestic activity and tourism recovery." ### Structural Risks - Natural disasters related to climate change. - Relative Likelihood: Medium - Expected Impact if Realized: Medium - Policy Response: - Prioritize the implementation of projects related to climate change. - Risk description: - "More frequent natural disasters deal severe damage to infrastructure (especially in smaller vulnerable economies) and amplify supply chain disruptions and inflationary pressures, causing water and food shortages and reducing medium-term growth." - "The materialization of risks related to natural disasters could trigger further public expenditures and alter the planned reduction of public debt." ### Risk Assessment Matrix methodology and framing (verbatim) - "The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. The conjunctural shocks and scenarios highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon." *Source: 1sycea2022006 - Annex I. Risk Assessment Matrix* ### 5. Monetary policy is to remain accommodative throughout 2022 to continue supporting ### 5. Monetary policy is to remain accommodative throughout 2022 to continue supporting ### Monetary policy stance and liquidity measures - Monetary Policy Rate (MPR) stands at 2.0 percent. - Interest rate on the Standing Deposit Facility (SDF) is 0.5 percent. - Interest rate on the Standing Credit Facility (SCF) is 3.5 percent. - Effective July 13, 2022, the Minimum Reserve Requirement (MRR) on rupee-denominated deposits was increased from 10 percent to 13 percent. - The applicable MRR on foreign currency deposits remained unchanged at 13 percent. ### External sector and tourism-driven recovery - The current account deficit improved to 10.5 percent of GDP in 2021 compared to 13.7 percent in 2020. - Revision of tourism earnings methodology (based on occupancy rate and room prices) led to a higher measured tourism contribution and an improved current account deficit. - For 2022, the current account shortfall is forecasted at 6.7 percent of GDP, primarily due to projected growth of 80 percent in tourism earnings to reach US$967 million. ### Real sector reforms: diversification, fisheries, and tourism - Government objective: enhance prospects for sustainable and inclusive medium-term growth via diversification of tourism services and fuller use of fisheries potential. - World Bank supported SWIOFISH 3 project envisaged to support fisheries production chain diversification and new operators. - Tourism Master Plan is being executed; a first tourism satellite account (TSA) developed with UNWTO to measure tourism’s GDP contribution. - Terms of reference for a tourism study to be finalized by end-June 2023 (structural benchmark). - Fish processing and aquaculture prioritized under the Transformative Economy Agenda. - Introduction of a special business tax regime of 15 percent to boost fish processing and aquaculture sectors and encourage new entrants. - Government investment in additional infrastructure for the sector as part of the 2022 and 2023 budget amounting to 0.2 percent of GDP. ### Energy transition and climate mitigation targets - Long-term commitment: achieve a decarbonized economy by 2050 and boost electricity generation from renewable energies (including marine energy technologies, bio-energies, biomass, waste-to-energy, and energy storage). - Acceleration of sustainability measures on Praslin and La Digue; revision of institutional, policy and legislative frameworks to support energy sector transition. - With updated NDC submission: - Economy-wide absolute GHG emissions will be reduced by 293.8 ktCO2e in 2030 (26.4 percent) compared to BAU. - Target: 30 percent of gasoline private vehicles to be electric by 2030. - Energy Efficiency improvement level of 15 percent by 2030. - Integrated Resource Plan (IRP) under the MIC TAF program of the AFDB: - Objective: revised Energy Policy Document with realistic targets for intermittent and non-intermittent renewable energy sources by last quarter 2022. - IRP procurement in RFP phase; study expected to be completed by the end of 2023. ### Climate adaptation and resilience investments - Priority climate adaptation investments identified in critical infrastructure, tourism and coastal management, food security, biodiversity, water security, and the blue economy. - Planned disaster risk reduction projects include establishing early warning systems and improving coastal resilience. - A prioritization exercise of climate change related projects is being undertaken to guide government spending. ### Agriculture, food security, and strategic reserves - Government objective: transform local food and nutrition production toward greater self-sufficiency by increasing local production of livestock, fruits & vegetables relative to total consumption. - Focus on strengthening adaptive capacity of local food producers to climate change. - Target to build national capacity for a strategic food reserve for a minimum period of six months. - Cold storage facility project underway, due for completion in 2023; financing for a dry storage facility being sought. ### Digitalization, entrepreneurship, and financial inclusion - MIEI priorities: improve ease of doing business and create a national entrepreneurship framework; digitalization of services has progressed. - As of July 2022, trade license applications obtainable online. - First phase of Investment Portal being trialed; back-end platform installed. - Seed Capital Grant Scheme revamped to support start-ups in priority sectors; Business Technology Incubator being set up. - Government provided funds of around 0.5 percent of GDP for the years 2023 to 2025 for digital economy projects. - Digital action plan medium-term focuses: - Improve legislative framework: new Communications Bill approved by Parliament; Data Protection legislation expected early 2023. - Promote digital platforms in public service delivery: digital ID, online Business/Company & Association registration, online License Application—key platforms came online in the last quarter of 2022; full implementation of the Health Information System expected by end 2022. - Enhance digital skills: digital skills to be compulsory in the national curriculum for all students at all levels; Policy paper ICT in Education approved by Cabinet in October 2022. - Increase financial inclusion via promotion of affordable financial products and new legislation such as e-money. - Improve payments infrastructure: Real Time Gross Settlement System (RTGS) for real time funds transfer. - Establish a central securities depository (CSD) to support deepening of financial markets and reduce clearing and settlement risks. - Develop digital entrepreneurial ecosystems. - Human Resource Management System (HRMS) funding to connect core HR/payroll, talent management, and people analytics. ### Fiscal policy stance, consolidation, and budget outcomes - Keystone objective: attainment of sustainable fiscal surpluses over the medium term to strengthen public debt sustainability. - Government commitment: achieve pre-COVID objective of reducing debt to 50 percent of GDP by 2026. - Measures introduced following the invasion of Ukraine to protect vulnerable groups cost: - 0.3 percent of GDP for the year 2022. - 0.2 percent of GDP for the year 2023. - A total of SR156.9 million (combined amount in 2023). - Specific measures include: - Adjustment in welfare benefits with the ceiling increased by 32 percent. - Sliding scale adjustment of local employees’ wages below the ceiling of R9000, with a maximum amount of R500 to be credited under the Temporary Salary Support (TSS) and R300 under the Temporary Electricity Support (TES). - Automatic temporary increment of R500 for select welfare and pension recipients. - Provisions for breakfast and lunch in public schools. - Temporary fuel tax exemption for licensed ferry vessels transporting cargo by sea between islands. - A Maximum Retail Price (MRP) strategy as an emergency temporary measure for not more than one year starting in October 2022. - Prospects for external grants weaker than anticipated; some capital expenditures delayed to 2023 pending grant financing. - Some increase in domestically-financed capital expenditure in 2022 partially offsets drop in foreign-financed capital expenditure; overall capital expenditure under-executed in 2022. - 2022 budget outcomes: - Primary deficit narrowed to 1.1 percent of GDP (driven by fall in grants and capital expenditures and targeted temporary cash transfers). - Targeted cash transfer program to run from July 2022 through first quarter of 2023; through July 2022, 7.7 million rupees out of an initial budget of 80 million rupees (0.2 percent of GDP) had been spent. - Authorities removed freeze on the 13th-month salary in 2022; going forward, half will be paid automatically and half based on performance. - 2023 budget aims: - Primary surplus of 1.1 percent of GDP. - Revenue excluding grants targeted to increase by 1.3 percentage points to 33.7 percent of GDP. - Expenditure to increase by 0.4 percentage points to 36.8 percent of GDP. - Revenue increases expected from VAT receipts, business tax receipts via new measures in 2023, and a tourism marketing tax of 0.5 percent based on turnover. - Government will introduce a salary increase in April 2023 after a salary freeze since 2019. - Home carers’ scheme costing at around 1.1 percent of GDP under ASP to be moved under wages and salaries and goods and services as it becomes a new agency. - Capital outlays will increase by 1.7 percent of GDP, partly financed by grants. - 2023 fiscal projections: - Overall deficit would amount to 1.8 percent of GDP. - Small need for domestic financing of 0.3 percent of GDP, taking into account external project loans and budgetary support from the World Bank and the AfDB. - Government and government guaranteed debt projected to decline by about 3.3 percentage points, to 64.6 percent of GDP. ### Revenue administration, customs modernization, and compliance measures - Revenue reform focus: digitalization initiatives, stronger compliance monitoring, and enhancement of the ASYCUDA customs system. - ASYCUDA World enhancements underway to add modules: Excise Warehouses, E-Payment, E-Government, Single Window, Express Courier, Manifest for Courier; continuous technical training included. - Express Courier and Manifest modules fully developed; awaiting airlines and courier providers to complete system modifications; module expected operational by the end of October 2022. - The Tariff 2022 completed and expected to go live by end of October 2022. - E-Payment module development started; estimated completion third quarter of 2023. - Excise Warehouse expected ready for testing during the first quarter of 2023. - Single Window platform expected to be fully developed by the second quarter of 2024. - Compliance and tax administration modernization: - SRC improving and diversifying online services and Client Management System (CMS). - Plan to implement a modern Tax Management System (TMS) to replace the CMS, with more automation, digital solutions and less manual work to improve efficiency and ease of interaction for taxpayers. - TMS implementation will adopt new technologies and management practices to increase efficiency, improve Ease of Doing Business ranking, streamline bureaucratic practices, and enhance taxpayer engagement and service standards. *Source: 1sycea2022006 - 5. Monetary policy is to remain accommodative throughout 2022 to continue supporting* ### 27. SRC recognizes the need to modernize and simplify tax processes through business ### 27. SRC recognizes the need to modernize and simplify tax processes through business ### Business process reengineering and Tax Management System (TMS) rollout - Process reengineering completed for: Taxpayer Registration, Filing and Processing of Returns, Tax Payment Processing and Taxpayer Accounting. - Registration module development completed and undergoing final user-acceptance testing; expected to go live towards the end of October 2022. - Next step: finalize user requirements for the core modules; expected completion by the end of October 2022. - Phased development and deployment timeframes: - Registration – End of October 2022 - Core modules (Return and remittance, Taxpayer accounting, Revenue accounting) – June 2023 - Non-Core modules (Taxpayer Audit, Compliance and Enforcement, Workflow and Case Management, System Management) – June 2024 - Financing for TMS provided by the EU under an agreement signed in April 2019. - Cabinet of Ministers approved development of a new taxation management system aiming to complete the project in 2023. - Key deliverables: increased revenue collection, increased use of digital services to lower compliance costs, improved voluntary compliance, increased taxpayer registrations, and additional opportunities for taxpayer education. - If EU approval for an extension is received, non-core modules expected by December 2024. ### Data cleansing, training, and public engagement - SRC, with support from GOPA, conducting data cleansing for the registration module; public outreach to validate and provide missing information to meet minimum TMS requirements. - Plan to complete most of the registration data cleaning exercise by end of December 2022. - Staff training and public awareness have commenced to ensure SRC staff and the public can use and support the new system and procedures. ### Compliance improvement, amnesty results, and expected compliance gains - Amnesty Program outcomes: - Registration of 52 new businesses - Submission of 4,637 outstanding returns - Collection of SR 297.7 million - SRC will modernize tax return processing to improve tax collection and ensure businesses meet obligations. - Voluntary compliance measures: educational outreach, ease of filing and payment, enforcement actions against late filers/payers. - A Compliance Improvement Plan is being finalized and will be piloted soon; full implementation to start as of January 2023 — expected to increase the overall tax compliance rate. ### International taxation capacity building and exchange of information - Technical assistance from TIWB for Transfer Pricing to enable transfer of tax audit knowledge through a real-time “learning by doing” approach. - World Bank provided initial guidance on Transfer Pricing regulations expected to be finalized by the end of 2022. - SRC recruited a Technical Advisor (TA) to assist with practical audit casework including Transfer Pricing, review of Intelligence framework, risk profiling and case selection, and assist the International Tax Unit with BEPS Actions and Exchange of Information; TA to build capacity and deliver continuous smaller training sessions over one year. - Two international tax experts: one in post since September 2022, another due to start before the end of the year; both will build internal capacity in transfer pricing. - World Bank assisting on necessary regulations expected to be finalized and gazetted by early November 2022. - SRC acquired a system for Automatic Exchange of Information to meet OECD standards: - Development for Common Reporting Standards (CRS) and Country By Country reporting (CBCr) completed; modules deployed and to be tested and go live in October 2022. - Case management system for exchange-of-information requests developed, tested, and used by International Tax Unit staff since October 2022. ### Tax policy changes, business tax reform, and revenue projections - Business tax reforms planned for 2023: - From January 1, 2022, Government unified business tax rate for different productive sectors at 25 percent (tourism, fishery and agriculture still benefit from a lower 15 percent profit tax rate). - Reduced accelerated depreciation provisions for tourism, agriculture and fishery. - Agricultural sector to have a grace period of 3 years for assessment of best tax modalities. - Revised framework for taxation of security dealers from January 2023. - Turnover tax of 2 percent on large hotels from January 2023. - Environmental and sustainability tax applicable to tourists: fixed rate per night per visitor, to be introduced from April 2023. - Expected additional revenue from the above reform measures: 1.4 percent of GDP in 2023. ### IMF FAD VAT assessment and VAT reform strategy - IMF Fiscal Affairs Department (FAD) completed a VAT assessment in September 2022 based on: - in-depth review of the VAT law and key regulations, - benchmarking against international practice, - quantitative assessment of key design elements (registration threshold, exemptions, associated revenue loss and neutrality implications), - discussions with business community, tax and customs administrations. - FAD findings: - VAT has performed as well as it could from a revenue perspective, but neutrality and revenue yield risks eroding if policymakers continue to broaden exemptions. - Three sectors (wholesale and retail; accommodation and restaurant services; information, financial and professional services), and 35 percent of registered mostly medium to large taxpayers, account for over 70 percent of VAT collection and 97 percent of the VAT base. - Government strategy for reforming VAT based on pillars: - Stabilize VAT policy by refraining from further broadening of exemptions. - Set up a task force from the Ministry of Finance, SRC, Customs, and the business community to review VAT law and suggest legislative changes to improve clarity—without changing policy; task force work during 2023 for implementation in January 2024; further technical assistance required from FAD during 2023. - Ministry of Finance to prepare a short report on VAT tax expenditures to be included as part of the 2024 budget presented to Parliament; mandatory in the VAT law. - Draw a medium-term plan to reform VAT policy to streamline exemptions where the impact on the most vulnerable is negligible. - Original structural benchmark: review of the list of exemptions by end-September 2022; revised timing: review exemption list to be completed by end of December 2023 before finalization of the 2024 budget. - Prepare a tax expenditures report on all exemptions (by broad categories) and a study of distribution and incidence. - Ministry involvement in OECD two-pillar discussions on digitalization tax challenges; 2023 participation to finalize Pillar 1 rules and domestic legislative amendments to follow in collaboration with the Office of the Attorney General. ### Sector-specific tax review: yacht industry - Yacht industry growth noted, with identified need for an audit to understand the industry and loopholes, and an assessment of existing policies and regulations to enhance oversight and maximize revenue collection. - Authorities will request technical assistance from the IMF. *Source: 1sycea2022006 - 27. SRC recognizes the need to modernize and simplify tax processes through business* ### 43. The government has taken steps to strengthen management of state-owned ### 43. The government has taken steps to strengthen management of state-owned enterprises and reduce transfers from the budget ### Strengthening state-owned enterprise (SOE) governance and fiscal transfers - Transfers to state-owned enterprises are being reduced from 2.0 percent of GDP in 2020 to 0.1 percent forecasted for the year 2023. - The new Public Enterprise bill was gazetted in October 2022 and will: - Provide a harmonized and coherent framework for establishment, governance, and operation of Public Enterprises. - Make provisions for efficient governance and monitoring of performance. - Require the Public Enterprises Monitoring Commission (PEMC) to publish a Public Enterprises' Annual Report (structural benchmark for end-June 2023). - The Public Enterprises' Annual Report will: - Present overall financial performance based on audited financial statements. - Be published six months after the closing of the financial year. - The new legislation will clarify accountability and relationships between: - Board members and those charged with governance and management of Public Enterprises, Responsible Ministers, the Minister responsible for Finance, and the Commission. ### PEMC audits and operational assessments (phased plan) - PEMC, through an independent audit firm, will conduct governance audits and operational assessments of five key public enterprises. - Phase 1 (to be completed in June 2023): focus on Public Utilities Corporation (PUC) and Seychelles Petroleum Company (SEYPEC). - Phase 2 (to be completed in December 2023): focus on Air Seychelles, Island Development Company Limited, and Seychelles Trading Company Ltd (STC). ### Executive compensation and transparency - In 2021, PEMC requested assistance from the U.S. Treasury Office of Technical Assistance to review executive compensation at SOEs to ensure greater transparency, equity, and consistency. - The draft assessment report recommends implementation of a comprehensive job grading scheme, such as the Hay Method, to enhance transparency, equity and consistency. - Authorities will work with PEMC to set consistent and transparent criteria for salary packages of SOEs. - The Government will publish information about state-owned compensation to advance transparency. ### Air Seychelles restructuring and related financing - Authorities are finalizing the restructuring of Air Seychelles to ring-fence ground handling operations as a separate legal entity. - As part of the finalization, the Government took a USD 13 million loan from Trade Development Bank (TDB) to repay Etihad liabilities and release the security on the two twin otter airplanes. - Interest will be serviced by Air Seychelles. - The Government will repay the principal over two years as per the original plan. - The Government considers Ground Handling at Seychelles International Airport a strategic asset to remain sole property of the Government. - Operational restructuring to ring-fence ground handling into a separate legal entity targeted by end 2022 (structural benchmark for end-December 2022). - The Government commits to provide no further funds to Air Seychelles. ### Public Debt Management Strategy - Government has been formulating a quarterly borrowing plan on a recurring basis; approved by the National Debt Committee (structural benchmark for end-March 2022). - The revised 2022 Annual Borrowing Plan was published following the mid-year review (structural benchmark for end-September 2022). - The Medium-Term Debt Management Strategy (MTDS) (structural benchmark for end-September 2022) will be published after finalization of 2023-2025 Budget numbers by end-2022. - In accordance with the Public Debt Management Act (2008), the net amount guaranteed in any financial year is approved by the National Debt Committee and does not exceed an agreed upon celling. - Government bond issuance: - Since the beginning of 2022, government issued three sets of Treasury bonds in March, May and August. - Government guaranteed two bonds on behalf of Development Bank of Seychelles (DBS), one in March and one in April. - Quarterly publication of issuance calendar for bonds on the Ministry of Finance website (structural benchmark for end-March 2022). - Issuance supported by planned trading reforms in government securities and development of repo market. ### Monetary and exchange rate policy - Accommodative monetary policy stance to be maintained for the rest of 2022 to support recovery while monitoring domestic price dynamics. - Central Bank of Seychelles (CBS) remains vigilant to domestic and external developments and will implement appropriate measures and provide forward guidance on plans to respond to inflationary pressures. - CBS plans to implement a survey on inflation expectations with support of the National Bureau of Statistics. - Interest rate transmission and market developments: - Transmission of interest rates remains weak despite overall decline following the realignment of the corridor in Q3 2021. - To improve transmission, CBS plans to implement recommendations from IMF MCM technical assistance to develop the money and FX markets. - CBS expects transmission to improve once excess liquidity in the system is addressed. - In August 2022: - Average savings rate fell by 38 basis points relative to August 2021. - Average lending rate decreased by 22 basis points relative to August 2021. - Cost of government borrowing generally stable for most of the year, with a marginal uptick as of June 2022. - In August 2022, average yield on T-bills stood at: - 0.92 percent on 91-day bills, - 1.58 percent on 182-day bills, - 2.20 percent on 365-day bills. - Exchange rate policy: - CBS committed to a floating exchange rate, intervening only to facilitate orderly market conduct. - Given robust tourism performance and anticipated positive outlook, market-clearing conditions are expected to prevail. - Gross International Reserves (GIR): - GIR declined from US$702 million at end-March 2022 to US$640 million as of September 29, 2022. - Last FX intervention conducted in February 2022 to improve market functioning. - No direct sales were made to SOEs in 2022. - Reduction driven primarily by faster outflows compared to inflows; no foreign exchange auction (FEA) was conducted during this period. - Reserves Advisory and Investment Management: - Three-year Advisory and Investment Management Agreement (AIMA) with RAMP of the World Bank was due to expire on August 1st, 2022; extended by another 3 months with RAMP guidance. - Current engagement includes technical advisory and an investment management mandate for US$100 million. ### Improvements in external statistics - An alternative framework was used to estimate tourism earnings incorporated into balance of payments statistics for Q1 2022. - With Fund TA, the statistical series was revised for 2016 to 2021. - New methodology calculates tourism earnings based on occupancy and room prices and includes estimates of tourism revenue held abroad, improving coverage of revenue and expenses related to the sector. - External statistics also incorporated a revision on net foreign assets held by the private sector. - Methodological changes and revised balance of payments statistics were communicated to stakeholders and media in August 2022. ### Modernizing the financial system and ensuring financial stability - Banking sector soundness and indicators (as at end-July 2022 unless otherwise noted): - All banks remained well above the prudential capital requirement of 12 percent. - Aggregated regulatory capital to risk weighted assets remained broadly stable at 20.7 percent (year-on-year comparison). - Non-performing loans increased by SCR320 million year-on-year to SCR797 million as at end-July 2022. - Return on assets decreased by 1.1 percentage points to settle at 3.3 percent. - Return on equity decreased by 10 percentage points to settle at 37.5 percent. - Core liquid assets increased. - Industry foreign currency exposure: long position increased by 8.5 percentage points; short position decreased by 2.7 percentage points — both within exposure limits. - CBS supervisory stance and tools: - CBS committed to monitoring and supervising the financial system and to take timely enforcement actions if necessary, including suspension of dividend payments for undercapitalized banks. - Viable but undercapitalized banks to submit capital plans; nonviable institutions to be resolved with appropriate resolution tools. - Unwinding of COVID-19 relief measures: - Private Sector Relief Credit Line Facilities fully unwound effective March 31, 2022. - Moratorium and debt restructuring measures phased out on July 01, 2022. - Investors had until July 15, 2022 to sell government securities to CBS under the buy-back scheme implemented under the force majeure clause. - Enhanced monitoring and forbearance withdrawal: - CBS enhanced monitoring by collecting data on restructured and rescheduled loans. - Completed assessment of unwinding measures' impact on asset quality (structural benchmark for end-September 2022). - Banks restructuring loans for viable firms with temporary liquidity shortages on a case-by-case basis. - Risk-based supervision and Basel adoption: - Implementation and adoption of the risk-based supervision (RBS) framework integrating Basel II Pillar 2 requirements is ongoing. - Policy paper for adoption of Basel II Pillar 1 is at the Attorney General’s Office for drafting. - CBS anticipates finalizing Basel II Pillar 3 disclosure guidelines by end-Q1 2023. - Financial Stability Committee (FSC) and legislative changes: - Work ongoing to strengthen legal basis and mandate of FSC. - Policy paper submitted for Cabinet approval to support drafting of a financial stability bill with US OTA Financial Stability consultant assistance. - CBS will, in consultation with IMF staff, submit amendments to the CBS Act to Cabinet by May 2023 (structural benchmark) to: - (i) strengthen governance and oversight; - (ii) enhance institutional and personal autonomy; - (iii) safeguard financial autonomy. - Bank resolution framework: - Policy paper supporting drafting of an effective resolution framework, aligned with BCBS recommendations and FSB Key Attributes, was endorsed by Cabinet in December 2018 and later updated. - Updated policy paper on bank resolution submitted to Cabinet in October 2022 (structural benchmark). - With IMF TA, draft Bank Resolution Bill will be prepared and is expected to be approved by Cabinet by September 2023. - Capital market and government securities market development: - Ministry of Finance working with CBS, Financial Services Authority and stakeholders to develop a well-regulated capital market and efficient market infrastructure. - IMF provided TA in mid-July to assist policy framework for secondary market development for government securities. - Government securities trading framework plan expected to be approved by government in consultation with CBS by the end of March 2023 (structural benchmark). - National Payment System and modernization: - Legislative review of National Payment System Act 2014 and supporting regulations to align with international standards; policy proposals for amendments anticipated for stakeholder consultations by end-December 2022. - Technical assistance from US OTA toward establishment of an entity to manage payment system platforms, including assessing PFMI gaps. - CBS aims to phase out cheques as a payment instrument. - Study to assess affordability and reliability of internet and network connection expected to commence in second half of 2022. - New CORE Banking System: RFP issued to shortlisted vendors; evaluation process aims to be completed by end of February 2023. - Regulatory sandbox and FinTech: - Formulation of Regulatory Sandbox ongoing with Alliance for Financial Inclusion assistance; consultant recruited to formulate framework. - Knowledge exchange with Fiji and Malaysia undertaken. - CBS anticipates creating an innovation hub/incubator to coordinate stakeholder engagement on FinTech regulatory issues. - Capacity building and stakeholder engagement event organized in October with AFI assistance. - Consumer protection and credit information: - Strengthening of financial consumer protection and digital financial literacy under National Financial Education Strategy. - With enactment of Consumer Protection Act, regulations to address complaint handling, credit granting and debt recovery, charges and fees, and digital financial services are being prepared. - Implementation of a new Credit Information System and Credit Reporting Legislation to broaden coverage and improve creditworthiness assessment: - Project to implement new system expected to be completed in December 2022. - Legal framework expected to be enacted in the first quarter of 2023. *IMF staff report excerpt.* ### 69. Seychelles published the first National Risk Assessment (NRA) on Virtual Assets (VA) ### 69. Seychelles published the first National Risk Assessment (NRA) on Virtual Assets (VA) ### NRA on VA/VASP: assessment and follow-up - The National Anti-Money Laundering and Countering the Financing of Terrorism Committee (NAC) conducted the NRA over the first half of 2022 and assessed the money laundering (ML) and terrorist financing (TF) risks associated with VA/VASP regime, consistent with Financial Action Task Force (FATF) Recommendations. - The Cabinet of Ministers endorsed the NRA, which was published in August 2022. - The NRA concluded that Seychelles’ exposure to ML/TF risks to VA/VASP is very high, owing to a lack of regulatory framework. - In response, the NAC is preparing a Policy Framework to address the high ML/TF risks from the VA/VASP sector in line with international best practices. This Policy Framework will be finalized by end of 2022. - The findings of the VA/VASP NRA will also be fed in to the wider second National Risk Assessment, which was launched in July of this year and remains ongoing. ### Beneficial ownership (BO) database: coverage and planned reforms - Since the centralized BO database became operational within the Financial Intelligence Unit (FIU) in July 2021, a total, 53,340 international business companies (IBCs) or 90.2 percent of total IBCs in good standing have submitted BO information to the database as of August 2022. - The FIU submitted to the NAC an overview of the beneficial ownership data report on the level of compliance of BO obligations with respect to legal persons and legal arrangements. - Planned reform measures: - Strengthen the legal framework for beneficial ownership to effectively address significant ML/TF risks identified in the September assessment report. - The FIU assessment report revealed that while the fields in the BO database have been populated, some discrepancies in the dataset have been observed. - The FIU will publish a version of the assessment report by end-October to guide legal persons, legal arrangements and their registered agents in complying with requirements for the BO database. - In consultation with IMF staff, the FIU will work with NAC in drafting amendments to the BO Act by end-December 2022, to address gaps identified in the assessment report and ensure the effectiveness of the BO regime (including enhancing proportionate, dissuasive and effective administrative sanctions and penalties for those who fail to comply with the BO information requirements under the BO Act). Consultations with the industry are currently underway. - Advance in verifying the accuracy, adequacy and timeliness of the BO information in the database. - As part of the September 2022 assessment report, the FIU submitted a summary of statistics on the central BO database. - In line with its strategic analysis function under section 28 (5) (b) of the AML/CFT Act, the FIU will continue to submit on a quarterly basis to the NAC this summary of statistics (including the number of requests for information to the BO database, disseminations to other FIUs and/or other foreign/domestic authorities, the level of compliance by resident agents and international cooperation/exchange of information, and identified typologies or red flags of abuse). - The FIU conducted targeted verification by cross referencing the BO database with other information including suspicious transaction reports, OFAC and EU sanction lists. One positive match was identified, and the international business company was struck off the register by the FSA on 8th September 2022. - The FIU and FSA are working together to ensure that remaining legal persons and legal arrangements are fully compliant in submitting required information in the BO database. - Moving forward, we will ensure that the FIU has effective access to all relevant databases for purposes of verifying the information in the BO database, and establish mechanisms for processing reports on information discrepancies found in the BO database. - The National AML/CFT committee is working closely with the European Union Global Facility on Anti-Money Laundering and Countering the Financing of Terrorism (EU AML/CFT Global Facility) to provide technical assistance on the Seychelles’ Beneficial Ownership Legal Framework Analysis. The EU AML/CFT Global Facility will assist Seychelles authorities in Beneficial Ownership (BO) verification and the publication of BO statistics to enable the detection of outliers. - Advance on risk-based AML/CFT supervision of the 63 licensed resident agents, to ensure compliance with BO information requirements. - The FSA is conducting focused inspections with respect to beneficial ownership information of legal persons and legal arrangements required to be maintained at the office of their resident agents in Seychelles. - During Q3 of 2022, sixteen resident agents were subject to on-site inspections, and a sample of 1,243 IBCs were reviewed. - Significant shortcomings revealed: - non-submission of BO information by the IBCs (9.8 percent); - non-compliance with the format of submitting BO information (51.97 percent). - Following the inspections, the FSA will be initiating enforcement actions against the non-compliant IBCs during quarter four of 2022. - A strategic risk analysis will be used to assist the FSA in selecting IBCs to be part of its Q4 focused inspections. - By end-January 2023, the FSA will publish a summary of its findings for the resident agent sector with respect to the compliance with identification and verification of beneficial ownership of legal persons and legal arrangements as well as statistics on enforcement actions and penalties imposed for AML/CFT violations. ### Transparency, EOIR Supplementary Peer Review, and EU listings - Launch of Second Round Supplementary Peer Review on Transparency and Exchange of Information on Request (EOIR) for Seychelles. - The Republic of Seychelles has been removed from Annex I of the European Union’s (EU’s) list of non-cooperative jurisdictions for tax purposes (the “EU blacklist”) following the Economic and Financial Affairs Council of the EU meeting on the 5th of October 2021. - The only remaining step needed to enable Seychelles to be removed from Annex II of the list of non-cooperative jurisdictions (the “EU grey list”) for criterion 1.2 (tax transparency) is obtaining a Largely Compliant status in the forthcoming Supplementary Review. - In accordance with the 2016-2025 Schedule of EOIR Reviews, the commencement of the supplementary second round peer review of the Seychelles started on the 1st of October 2022, which will cover the Seychelles’ legal and regulatory framework for transparency and exchange of information on request for tax purposes as well as the practical implementation of that framework. - The first step of the review is for the Seychelles to fill in the EOIR Supplementary Review Questionnaire for the Second Round of EOIR Reviews covering the period from 1 April 2019 to 31 March 2022. - It is currently planned for the draft report to be submitted to the Peer Review Group for consideration and discussion at the PRG meeting of June 2023. Once this process is completed, the EU Economic and Financial Affairs Council will consider that report to remove Seychelles from Annex II of the list of non-cooperative jurisdictions (the “EU grey list”) for criterion 1.2 (tax transparency). ### Program monitoring (context for implementation) - Program implementation will continue to be monitored through semi-annual reviews, quantitative performance criteria and indicative targets, continuous performance criteria, and structural benchmarks. - The fourth review is set for June 2023 based on end-December 2022 quantitative targets and the fifth review is set for December 2023 based on end-June 2023 targets. - Detailed definitions and reporting requirements for all performance criteria are contained in the Technical Memorandum of Understanding (TMU) attached to this memorandum. *Source: 1sycea2022006 - 69. Seychelles published the first National Risk Assessment (NRA) on Virtual Assets (VA)* ### 1. Net domestic financing (NDF) of the government is defined as the sum of: (i) net bank credit ### 1. Net domestic financing (NDF) of the government is defined as the sum of: (i) net bank credit ### A. Definition of Net Domestic Financing (NDF) - NDF of the government is the sum of: - (i) net bank credit to the government, defined below; and - (ii) net nonbank financing of the government, including the proceeds of the sale of government assets, which includes proceeds from the divestiture of shares of public enterprises, that is privatizations, Treasury bills, and other securitized obligations issued by the government and listed in rupees in the domestic financial market, and any Central Bank of Seychelles (CBS) credit to the government, including any drawings on the rupees counterpart of the Special Drawing Rights (SDR) allocation. ### B. Data deemed valid under the program - Amounts deemed valid within the framework of the program: - Net bank credit to the government and the net amount of Treasury bills and bonds issued in rupees on the domestic financial market, calculated by the CBS. - Amounts for nonbank financing calculated by the Treasury of Seychelles. ### C. Gross and Net External Budgetary Assistance - Gross external budgetary assistance is defined as grants, loans, and non-earmarked debt relief operations (excluding project-related loans and grants, use of IMF resources, and debt relief under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief (MDRI) Initiatives). - Net external budgetary assistance is defined as the difference between gross external budgetary assistance and the sum of: - total debt service obligations on all public external debt (defined as the sum of interest payments and amortizations on all external loans, including interest payments and other charges to the IMF and on project-related loans, but excluding repayment obligations to the IMF), and - all payments of external arrears. ### D. Adjustors to NDF - NDF will be adjusted downward (upward) if net external budgetary assistance exceeds (falls short of) the program projections. ### E. Monitoring frequency for NDF - For monitoring, data will be provided to the Fund by the authorities on a monthly basis with a lag of no more than four weeks from the end-of-period. ### F. Floor on the Primary Balance - Definition: - The primary balance is total revenues and grants minus primary expenditure and covers non-interest government activities as specified in the budget. - The primary balance will be measured as cumulative over the fiscal year, and it will be monitored from above the line. - Revenue recognition: - Revenues are recorded when the funds are transferred to a government revenue account. - Tax revenues are recorded as net of tax refunds. - Revenues will also include grants. - Capital revenues will not include any revenues from non-financial asset sales proceeding from divestment operations. - Primary expenditure: - Central government primary expenditure is recorded on a cash basis and includes recurrent expenditures and capital spending. - Primary expenditure also includes transfers to State-Owned Enterprises (SOEs). - All primary expenditures directly settled with bonds or any other form of non-cash liability will be treated as one-off adjustments and recorded as spending above-the-line, financed with debt issuance, and will therefore affect the primary balance. - Adjustors: - The primary balance target will be adjusted upward (downward) by the surplus (shortfall) in disbursements of grants relative to the baseline projection. - Monitoring: - For the purpose of monitoring, data will be provided to the Fund by the authorities monthly with a lag of no more than four weeks from the end-of-period. ### G. Floor on Total Revenue - Definition of total government revenue: - Includes tax and nontax revenue, as shown in the fiscal table, but excludes external grants, revenue of autonomous agencies, and privatization receipts. - Adjustor: - The government revenue floor will be adjusted downward by the amount equivalent to the shortfall in gross domestic product compared to the program projections. - Monitoring: - For the purpose of monitoring, data will be provided to the Fund by the authorities on a monthly basis with a lag of no more than four weeks from the end-of-period. ### H. Floor on Net International Reserves (NIR) - Definition: - NIR of the CBS are defined as the difference between reserve assets and reserve liabilities with a maturity of less than one year. - Reserve assets include: - The CBS’s holdings of monetary gold, SDRs, foreign currency cash, foreign currency securities, deposits abroad, and the country's reserve position at the Fund. - Excluded from reserve assets: any assets that are pledged, collateralized, or otherwise encumbered, claims on residents, claims in foreign exchange arising from derivatives in foreign currencies vis-a-vis domestic currency (such as futures, forwards, swaps, options et cetera), precious metals other than gold, assets in nonconvertible currencies, and illiquid assets. - Reserve liabilities include: - (1) all foreign exchange liabilities to residents and nonresidents with maturity of less than one year, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, options, et cetera); and - (2) all liabilities outstanding to the IMF (only the total outstanding use of Fund Credit and loans is included in reserve liabilities). - Adjustors: - The floor on the CBS’s NIR will be adjusted upward (downward) by the amount by which the external non-project loans and non-project cash grants exceeds (falls short of) the amounts assumed in the program. - The floor will also be adjusted upwards (downwards) by the amount that external debt service payments fall short of (exceed) the amounts assumed in the program. - The floors will also be adjusted upwards by the amount of the new SDR allocation to Seychelles if the IMF makes a new allocation of SDRs to its membership. - Monitoring and audit: - For the purpose of monitoring, semiannually, at each test date for program quantitative targets, the net international reserves data submitted by the CBS to the IMF will be audited by the CBS’ internal audit division in accordance with International Standards on Auditing, to ensure conformity with the program definition and calculation methods. - Reports will be submitted to the IMF no later than two months after each test date. ### I. Non-Accumulation of New Domestic and External Arrears (continuous) - Domestic payments arrears: - Defined as domestic payments due but not paid by the government after a 90-day grace period, unless the payment arrangements specify a longer payment period. - The Ministry of Finance records and updates the data on the accumulation and reduction of domestic payments arrears. - Commitments: - The government undertakes not to accumulate any new domestic payments arrears. - The non-accumulation of new domestic payments arrears will be continuously monitored throughout the program. - The accumulation of any new domestic payments arrears will be reported immediately by the government to Fund staff. - External payments arrears: - The government undertakes not to accumulate any new external public payments arrears, with the exception of arrears related to debt that is the subject of rescheduling. - External public payments arrears are defined as payments due but not paid by the government as of the due date specified in the contract, taking into account any applicable grace periods, including contractual and late interest, on the external debt of the government or external debt guaranteed by the government. - The performance criterion on the non-accumulation of new external public payments arrears will be continuously monitored throughout the program. - The accumulation of any new external payments arrears will be reported immediately by the government to Fund staff. - Standard continuous performance criteria include: - 1) prohibition on the imposition or intensification of restrictions on making of payments and transfers for current international transactions; - 2) prohibition on the introduction or modification of multiple currency practices; - 3) prohibition on the conclusion of bilateral payments agreements that is inconsistent with Article VIII; and - 4) prohibition on the imposition or intensification of import restrictions for balance of payments reasons. ### J. Indicative Targets - Net change in consolidated government guaranteed domestic and external debt: - Government guaranteed domestic and external debt is defined as the public debt and includes the central government debt plus domestic and external guarantees provided by the government. - Floor on government social spending: - The indicative floor on social spending will apply to expenditures incurred by the government on plans and programs intended to have a positive impact on education, health, social protection, housing and community services and recreational activities, including: - Goods and services: day care scheme under IECD; breakfast and lunch under education and dedicated fund; home care giver transferred to family affairs, SPTC Bus refund for students. - Capital project: vulnerable home repair. - Social program of government: Housing finance scheme, home improvement/re-roofing scheme for pensioners, youth employment scheme, temporary financial assistance. - Transfers to public enterprises: SPTC- refund of bus fare for elderly, disability and workers special. - Benefits and approved programmes of agency for social protection: all budget lines under this code. ### K. Program Reporting Requirements - Performance under the program will be monitored from data supplied to the IMF by the authorities. - The authorities will transmit promptly to IMF staff any data revisions as well as other information necessary to monitor the arrangement under the EFF. ### L. Data and Information: Reporting Schedule and Items - The Seychelles authorities (government and CBS) will provide Fund staff with the following data and information according to the schedule provided. - The CBS will report: - Weekly (within one week from the end of the period): - Daily reserve money data. - Foreign exchange reserves position. - A summary table on the foreign exchange market transactions. - The results of the liquidity deposit auction, primary Treasury bill auctions, and secondary auctions. - Monthly (within four weeks from the end of the month): - The monetary survey in the standardized report form format. - The foreign exchange cash flow, actual and updated. - Financial soundness indicators. - Stock of government securities in circulation by holder (banks and nonbanks) and by original maturity and the debt service profile report. - The Ministry of Finance will report: - Monthly (within two weeks from the end of the month): - Consolidated government operations on a commitment basis and cash basis in the IMF supported program format and in GFSM2001 format. - The detailed revenues and expenditures of the central government and social security fund. - Import and export data from the customs department. - Public debt report reconciled with the cash operations to minimize any statistical discrepancy. - Consolidated creditors schedule on domestic expenditure arrears of the government. - Quarterly (within one month from the end of the quarter): - Accounts of the public nonbank financial institutions. - Consultation commitment: - The government and CBS will consult with Fund staff on all economic and financial measures that would have an impact on program implementation and will provide any additional relevant information as requested by Fund staff. *Source: 1sycea2022006 - 1. Net domestic financing (NDF) of the government is defined as the sum of: (i) net bank credit* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1sycea2022006.pdf_